The Dangers of Raising Your Prices - 4/19/2004 - Mortgage Loan Refinance Debt Equity

The Dangers of Raising Your Prices

Raise prices and lose money? How can that be? All the industry consultants tell us to raise our prices.

The problem is that the demand for remodeling and construction services is inelastic — an economics term that means that as prices rise, demand tends to fall. That is okay until the demand is for you.

In many cases, remodelers can rasie prices quickly. That’s okay when they start very low, at say a 25% markup for a 20% margin. A 10% price increase leads to a 37.5% markup or 27.27% margin, a significant price increase — but you only go from being the bargain contractor to one in the middle of the pack. To go all the way to a 50% remodeling markup and 33.3% margin, you are raising your prices 20%.

Most of us would balk at paying that much of an increase for gas, a favorite restaurant, even golf! The bottom line is, if the markup results in 16.67% less target volume, you make less money than originally planned.

I know several companies in the post-2001 period that held their margins at 40% and lost 40% of their business volume, presumably not jobs for repeat clients and good referrals. Those that dropped their margins 5% actually did the same amount of work as planned, reducing their profit target 5% for the year. That zeroed out the net profit, but covered all overhead.

Those that kept their margins or raised them fell short of breakeven volume and lost money, lots of money. We should always price for a 10% net profit target, providing some wiggle room for slippage and inelasticity.

Give Your Clients Solid Reasons to Choose You

Your old clients and their referrals need a reason to choose your firm as you raise your prices to sustainable profit levels. Be sure you offer them a clear reason, other than price, to use you. Some ideas include:

• Extended warranty
• Free maintenance
• Design or selection services
• Awareness and use of higher quality materials and techniques

Acknowledge referrers with gifts certificates, cards, flowers, etc.

Know When to Fold Them …

When times are bad — closing ratios are slipping, leads are decreasing, fewer clients are willing to be references — you need to add a dose of reality. Reduce your prices, but only to advertising source leads, when you notice call volume falling and you feel that price is the only way out short-term. Begin raising prices to reach profitability when your leads are seasonally strong, your niche is solid and less competitive and you have developed a unique selling proposition, etc.

Know When to Hold Them …

Hold prices when the competition is no different than you are, your clients are not raving cheerleaders for the quality of your work and you aren’t experiencing an increase in the quality and number of leads.

The following simple tips should help you navigate your course of action:

• Never give “discounts” — instead pull items out of a contract.
• Always get top dollar from your returning clients; you have earned their business and they are happy with your value proposition.
• Try to sell value — emotional benefits — not price.
• Do things other contractors are not doing, or not doing well.
• Take sales training; it is not a dirty word.

Alan Hanbury, CGR, CAPS, treasurer of the House of Hanbury, Newington, CT, immediate past chairman of the NAHB Education Board and past chairman of the National Remodelors™ Council, has given many presentations at local, region and national home/remodeling shows on controlling overhead, planning for profit, cash flow and advanced financial analysis. For more information, contact Hanbury via e-mail.